WEAKNESSES

High levels of unemployment and poverty accentuating inter-ethnic tensions

Risk assessment

Growth to rise slightly in 2016

Activity slowed in 2015 for the fourth consecutive year. However, it is expected to grow slightly in 2016. Household consumption is set to recover, buoyed by the emergence of a middle class with low debt levels, support for those with the lowest incomes and lower inflation. However, consumption is likely to be affected by renewed cuts in subsidies, especially on electricity prices. Investment is expected to benefit from the acceleration of reform momentum initiated by President Widodo with notably measures designed to liberalise the economy and boost foreign investments. Monetary policy easing (-100 basis points since early 2016) allowed by lower inflation and strengthening of the rupiah should also support activity. Besides the government aims at accelerating infrastructure development and the property market will benefit from lower property taxes. Nevertheless, investor confidence should stay constraint by the uncertainties over economic policy and new episodes of exchange rate volatility. Meanwhile, the country, abundantly endowed with natural resources (oil, coal, natural gas, palm oil, rubber, ores) is expected to continue to suffer from weak commodity prices. The slowdown in China, the second largest recipient of Indonesian exports, will continue to affect the country's external trade. Finally activity will remain constrained by the structural weakness of the economy, bottlenecks and corruption.

The situation of the public finances and the external accounts will remain under control

Public debt will remain moderate in 2016. The removal of energy subsidies, which weighed heavily on the State's budget, will result in a reallocation of expenditure for public investment in infrastructure. Despite a cut in corporation tax and lower income from hydrocarbons, the public deficit is expected to remain contained thanks to a widening of the tax base and a partial fiscal amnesty for taxpayers repatriating offshore funds.

The current account deficit is expected to worsen slightly in 2016: the trade balance should continue to suffer from weak commodity prices and sluggish Chinese demand, while imports are expected to hold up. Dividend repatriation linked to foreign investments will impact negatively on the revenue account. Finally, the balance of services will still run a deficit but is expected to recover, thanks, in particular, to an increase in tourism revenues.
The Indonesian rupiah has been one of the currencies most affected by the announcements relating to the halting of the Quantitative Easing III programme of the US Federal Reserve in 2013 and the rupiah also depreciated by more than 9% between early March and end December 2015 because of new expectations regarding US monetary policy. Accordingly, the Indonesian currency could again depreciate in cas of the Fed tightening, which could improve the competitiveness of Indonesian exports but could also trigger more inflation. However, the situation has improved since 2015: the authorities have implemented a more cautious monetary policy, the current account balance has recovered and the foreign exchange reserves have risen (almost 8 months of imports in 2016). Nevertheless, additional reforms are still necessary to limit exchange rate vulnerability (liberalisation of investments, particularly relaxation of the rules for foreign investors and lifting of the prohibition on exports of raw minerals).

After a difficult first year, President Widodo is strengthening his position

The July 2014 presidential elections led to the victory of Joko Widodo (Indonesian Democratic Party of Struggle), former governor of Jakarta and the first president not from the army. However, his party does not have a majority in the parliament elected in April 2014, the opposition holding 60% of the seats. It is led by Prabawo Subianto, losing candidate in the presidential elections. As a result, President Widodo's ambitious reform objectives have been held up by the opposition and dissension within his own party. However, the president's power has been strengthened by new alliances and a major ministerial reshuffle in August 2015. Moreover, Joko Widodo is expected to continue the efforts of his predecessor, Susilo Bambang Yudhoyono, regarding the fight against corruption. A vast anti-corruption campaign was launched enabling several of the country's senior officials to be brought to justice. Since 2009, Indonesia has risen 24 places on the World Bank Corruption Index. However, the country continues to be hampered by substantial governance shortcomings.